by Calculated Risk on 1/27/2011 05:04:00 PM

Another ditty from Merle - this one on Germany (short to fit the time slot on Paul Solman's Making $ense (Solman is discussing Europe this week).

Note:
There is a a European debt woes lyric contest with Merle here.

For an overview of the entire series, watch a web chat video between Paul Solman and Merle over on Making Sen$e.

by Calculated Risk on 1/27/2011 02:38:00 PM

This month has been tough for hotel occupancy with only a small increase over the very low levels for the same period a year ago (includes the holidays). Here is the weekly update on hotels from HotelNewsNow.com: San Francisco tops weekly hotel performance

Overall, the U.S. hotel industry’s occupancy increased 6.5% to 49.8%, ADR was up 2.6% to US$96.39, and RevPAR finished the week up 9.3% to US$47.99.

The following graph shows the four week moving average of the occupancy rate as a percent of the median occupancy rate from 2000 through 2007.

Click on graph for larger image in graph gallery.

Note: I've changed this graph. Since this is the percent of the median from 2000 to 2007, the percent can be greater than 100%.

The down spike in 2001 was due to 9/11. The up spike in late 2005 was hurricane related (Katrina and Rita). The dashed line is the current level.

This shows how deep the slump was in 2009 compared to the period following the 2001 recession. This also shows the occupancy rate improvement has slowed sharply over the last month (only about 92% of the median from 2000 to 2007).

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 1/27/2011 01:05:00 PM

Here is the Financial Crisis Inquiry Commission report

Here are the conclusions.

• We conclude this financial crisis was avoidable. ...

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. ... Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.

This is absolutely correct. In 2005 I was calling regulators and I was told they were very concerned - and several people told me confidentially that the political appointees were blocking all efforts to tighten standards - and one person told me "Greenspan is throwing his body in front of all efforts to tighten standards".

The dissenting views that discount this willful lack of regulation are absurd and an embarrassment for the authors.

• We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the selfcorrecting nature of the markets and the ability of financial institutions to effectively police themselves. ...

Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse. And where regulators lacked authority, they could have sought it. Too often, they lacked the political will—in a political and ideological environment that constrained it—as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.

This is a key finding and absolutely correct.

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. ...

• We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis. ...

• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. ...

• We conclude there was a systemic breakdown in accountability and ethics. ... For example, our examination found, according to one measure, that the percentage of borrowers who defaulted on their mortgages within just a matter of months after taking a loan nearly doubled from the summer of 2006 to late 2007. This data indicates they likely took out mortgages that they never had the capacity or intention to pay. You will read about mortgage brokers who were paid “yield spread premiums” by lenders to put borrowers into higher-cost loans so they would get bigger fees, often never disclosed to borrowers. The report catalogues the rising incidence of mortgage fraud, which flourished in an environment of collapsing lending standards and lax regulation. ...

• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. ... Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay. ... These trends were not secret. As irresponsible lending, including predatory and fraudulent practices, became more prevalent, the Federal Reserve and other regulators and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission “to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” ...

• We conclude over-the-counter derivatives contributed significantly to this crisis. ...

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies.

My view is the keys to the crisis are 1) the willful lack of regulators to do their jobs, combined with 2) the rapid "innovation" in the mortgage market, especially the agency problems associated with the originate-to-distribute model. I'm just starting to read the report, but just based on the conclusions, this report deserves praise.

by Calculated Risk on 1/27/2011 11:24:00 AM

• From the Kansas City Fed: Survey of Tenth District Manufacturing

Growth in Tenth District manufacturing activity moderated somewhat in January, but activity was stronger than a year ago and optimism
remained fairly high. Price indexes in the survey were still elevated, particularly for raw materials.

The month-over-month composite index was 7 in January, down from 14 in December and 11 in November ... The employment index edged down from 11 to 8.

Note: I've been using the production index from the Kansas City Fed, and they have now introduced a composite index. The last of the regional Fed surveys for January will be released on Monday (Dallas Fed).

The ISM manufacturing index will released on Tueday, Feb 1st, and the regional Fed surveys suggest the index will be in the mid to high 50s (same range as December).

• From RealtyTrac: 2010 Foreclosure Activity Down in Hardest Hit Markets But Increases in 72 Percent of Major Metros

“Foreclosure floodwaters receded somewhat in 2010 in the nation’s hardest-hit housing markets,” said James J. Saccacio, chief executive officer of RealtyTrac. “Even so, foreclosure levels remained five to 10 times higher than historic norms in most of those hard-hit markets, where deep faultlines of risk remain and could potentially trigger more waves of foreclosure activity in 2011 and beyond. Meanwhile foreclosures became more widespread in 2010 as high unemployment drove activity up in 72 percent of the nation’s metro areas — many of which were relatively insulated from the initial foreclosure tsunami.”

• From the NY Times: S.&P. Downgrades Japan as Debt Concerns Spread

• From Bloomberg: Mortgage Rates on 30-Year U.S. Loans Increase for the Second Straight Week

The average rate for 30-year fixed loans climbed to 4.80 percent for the week ended today from 4.74 percent, according to Freddie Mac.

by Calculated Risk on 1/27/2011 10:00:00 AM

UPDATE:
• On February 23rd, the National Association of Realtors (NAR) will release revisions for the past three years (2008 through 2010) along with the January existing home sales report. This is the ordinary annual revision, and the revisions will probably be minor.

• The NAR is working on benchmarking existing home sales for previous years with other industry data. There is no planned release date for these possible revisions - if any are announced. The process is expected to be completed sometime after mid-year, and I expect this effort will lead to significant downward revisions to previously reported sales.

Original post:

Special Note: I've been discussing the National Association of Realtors (NAR) existing home sales data with several analysts. As an example, Keith Jurow has been sending me data from local areas, and also calculations based on data from Inside Mortgage Finance suggesting that the NAR existing home sales data is overstating sales. I've also looked at other sources, and I think the NAR started over estimating sales in 2006 or 2007 (perhaps by 5% or so in 2007), and the errors have increased since then (perhaps 10% or 15% or more in 2009 and 2010). I expect the NAR will revise down sales for these years in the not too distant future (I'm hearing whispers of coming revisions - but I haven't been able to confirm this with the NAR).

From the NAR: Pending Home Sales Continue Uptrend

The Pending Home Sales Index,* a forward-looking indicator, increased 2.0 percent to 93.7 based on contracts signed in December from a downwardly revised 91.9 in November [revised down from 92.2]. The index is 4.2 percent below the 97.8 mark in December 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

This suggests existing home sales in January and February will be somewhat higher than in December, although - based on mortgage applications - I think we might see a slight decline in sales.

by Calculated Risk on 1/27/2011 08:42:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 22, the advance figure for seasonally adjusted initial claims was 454,000, an increase of 51,000 from the previous week's revised figure of 403,000. The 4-week moving average was 428,750, an increase of 15,750 from the previous week's revised average of 413,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 15,750 to 428,750.

This was much higher than consensus expectations. The recent decline in the four week average has been good news - and this large increase (just one week) is concerning. Blame it on the snow ...

by Calculated Risk on 1/26/2011 08:57:00 PM

A ditty from Merle on Italy (short to fit the time slot on Paul Solman's Making $ense (Solman is discussing Europe this week).

by Calculated Risk on 1/26/2011 05:16:00 PM

The Census Bureau reported that new home inventory declined to 190,000 new houses for sale at the end of December. A common questions is: What inventory is included?

According to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

Click on graph for larger image in graph gallery.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale fell to 80,000 units in December. And the combined total of completed and under construction is at the lowest level since this series started.

In most areas the 'completed' and 'under construction' inventory of new homes is fairly lean. (Tom Lawler sent me a note just as I was finishing this post, he wrote: Currently new SF home inventories are “pretty lean,” which is good since new home sales are still “pretty soft.” )

Here are the New and Existing December home sales posts:
• New Home Sales increase in December
• December Existing Home Sales: 5.28 million SAAR, 8.1 months of supply
• Existing Home Inventory increases 8.4% Year-over-Year in December
• Home Sales: Distressing Gap
• Graph galleries for New Home and Existing Home sales

by Calculated Risk on 1/26/2011 02:15:00 PM

• The target range for the federal funds rate remains at 0 to 1/4 percent
• The policy of reinvestment of principal payments remains
• no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
• the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

From the Federal Reserve:

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

No dissent. A mention of rising commodity prices, but not much change in the language.

by Calculated Risk on 1/26/2011 12:10:00 PM

Here is an update to a graph I've been posting for several years (most of the text is a repeat).

This graph shows existing home sales (left axis) and new home sales (right axis) through December. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales).

Click on graph for larger image in new window.

Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits.

Note: it is important to note that existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

In a few years - when the excess housing inventory is absorbed and the number of distressed sales has declined significantly - I expect existing home-to-new home sales to return to something close to this historical relationship.

New and Existing December home sales posts:
• New Home Sales increase in December
• December Existing Home Sales: 5.28 million SAAR, 8.1 months of supply
• Existing Home Inventory increases 8.4% Year-over-Year in December
• Graph galleries for New Home and Existing Home sales